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March 8, 2012

Pensions: $1 Trillion Economic Impact

These retirement-benefit payments supported 6.5 million Americans and paid $315 billion in labor income in 2009

Pensions do more than protect older Americans after they retire; they have a distinct and significant impact on the U.S economy and play a role in job creation, according to the National Institute on Retirement Security. The organization released a report in March that provides a look at defined-benefit plans’ impact on the economy.

The report, “Pensionomics 2012,” studied data for 2009 from the U.S. Census and IMPLAN, an economic impact modeling system. The report found nearly 19 million retired Americans received more than $426 billion in pension benefits. That $426 billion paid out in pension benefits supported over $1 trillion in output, the report found, including $388 billion in direct impacts, $280 billion in indirect impacts and $341 billion in induced impacts.

“This is roughly equivalent to the total output contributed by the entire wholesale trade industry, which generated $1.0 trillion in total output in the national economy in 2009,” according to Ilana Bovie, director of programs for NIRS and the author of the report.

Bovie illustrates pensions’ impact with the example of a retired firefighter. He directly impacts his local economy when he uses his pension income to buy a lawnmower. The indirect impact of his purchase is an increase in income not just for the store where he purchased the lawnmower, but for every company involved in its production and distribution. When those companies benefit from increased income, they can hire new employees who spend their paychecks in their local economies, the induced impact of the firefighter’s purchase.

While a single firefighter buying a lawnmower is unlikely to have such a dramatic impact on the national economy, the combined force of the 10,000 baby boomers who will turn 65 every day for the next 19 years (according to the Pew Research Center) and begin retiring and using their pensions, make that pension ripple effect look more like a wave.

In addition to the impact on output, expenditures made from pension-benefit payments supported 6.5 million Americans and paid nearly $315 billion in labor income. Retirees’ expenditures of pension benefit payments contributed $553 billion to GDP and $134 billion in federal, state and local tax revenue.

“Virtually every state and local economy across the country is enhanced substantially from the spending of pension benefits,” Bovie wrote. “This economic stimulus is particularly important given the economic downturn and high unemployment rate in the wake of the Great Recession.”

Furthermore, “reliable pension income” works to stabilize local economies in a downturn, while retirees who depend only on a 401(k) may be reluctant to spend income from it, especially considering the effect of a market downturn.

Pension expenditures have large multiplier effects as well. For each dollar paid out in pension benefits, according to the report, $2.37 in total economic output was supported, and for every taxpayer dollar contributed to state and local pensions, $8.72 in total output was supported nationally.

Food services, real estate, health care and retail trade sectors benefited the most from the effects of pension expenditures.

“In supplying a stable source of income to retirees, DB pension plans support the national economy, as well as local economies throughout the country, with jobs, incomes, and tax revenue,” Bovie writes. “Especially in these times of financial crisis and economic instability, pension benefits play an important role in providing a stable, reliable source of income not just for retired Americans, but also for the local economies in which their retirement checks are spent.”